UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

      (Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-3876

HOLLY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		75-1056913
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Crescent Court, Suite 1600
Dallas, Texas		75201-6915
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (214) 871-3555

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

50,244,495 shares of Common Stock, par value $.01 per share, were outstanding on July 31, 2009.

 

 

HOLLY CORPORATION
INDEX

		Page
PART I. FINANCIAL INFORMATION
Forward-Looking Statements			3
Definitions			4
Item 1. Financial Statements
Consolidated Balance Sheets June 30, 2009 (Unaudited) and December 31, 2008			6
Consolidated Statements of Income (Unaudited) Three and Six Months Ended June 30, 2009 and 2008			7
Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2009 and 2008			8
Consolidated Statements of Comprehensive Income (Unaudited) Three and Six Months Ended June 30, 2009 and 2008			9
Notes to Consolidated Financial Statements (Unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			50
Reconciliations to Amounts Reported Under Generally Accepted Accounting Principles			50
Item 4. Controls and Procedures			57
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			58
Item 6. Exhibits			61
Signatures			62
EX-10.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

References herein to Holly Corporation include Holly Corporation and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to Holly Corporation and its consolidated subsidiaries or to Holly Corporation or an individual subsidiary and not to any other person with certain exceptions. For periods prior to our reconsolidation of Holly Energy Partners, L.P. (“HEP”) effective March 1, 2008, the words “we,” “our,” “ours” and “us” exclude HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation. Our consolidated financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact included in this Form 10-Q, including, but not limited to, those under “Results of Operations,” “Liquidity and Capital Resources” and “Risk Management” in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I and those in Item 1 “Legal Proceedings” in Part II, are forward-looking statements. These statements are based on management’s beliefs and assumptions using currently available information and expectations as of the date hereof, are not guarantees of future performance and involve certain risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that our expectations will prove to be correct. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in these statements. Any differences could be caused by a number of factors, including, but not limited to:

	•		risks and uncertainties with respect to the actions of actual or potential competitive suppliers of refined petroleum products in our markets;
	•		the demand for and supply of crude oil and refined products;
	•		the spread between market prices for refined products and market prices for crude oil;
	•		the possibility of constraints on the transportation of refined products;
	•		the possibility of inefficiencies, curtailments or shutdowns in refinery operations or pipelines;
	•		effects of governmental and environmental regulations and policies;
	•		the availability and cost of our financing;
	•		the effectiveness of our capital investments and marketing strategies;
	•		our efficiency in carrying out construction projects;
	•		our ability to acquire refined product operations or pipeline and terminal operations on acceptable terms and to integrate any future acquired operations;
	•		our ability to successfully integrate the operations of the Tulsa Refinery into our business;
	•		the possibility of terrorist attacks and the consequences of any such attacks;
	•		general economic conditions; and
	•		other financial, operational and legal risks and uncertainties detailed from time to time in our Securities and Exchange Commission filings.

Cautionary statements identifying important factors that could cause actual results to differ materially from our expectations are set forth in this Form 10-Q, including without limitation in conjunction with the forward-looking statements included in this Form 10-Q that are referred to above. This summary discussion should be read in conjunction with the discussion of risk factors and other cautionary statements under the heading “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 and in conjunction with the discussion in this Form 10-Q in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the headings “Liquidity and Capital Resources.” All forward-looking statements included in this Form 10-Q and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

DEFINITIONS

Within this report, the following terms have these specific meanings:

     “Alkylation” means the reaction of propylene or butylene (olefins) with isobutane to form an iso-paraffinic gasoline (inverse of cracking).

     “BPD” means the number of barrels per calendar day of crude oil or petroleum products.

     “BPSD” means the number of barrels per stream day (barrels of capacity in a 24 hour period) of crude oil or petroleum products.

     “Black wax crude oil” is a low sulfur, low gravity crude oil produced in the Uintah Basin in Eastern Utah that has certain characteristics that require specific facilities to transport, store and refine into transportation fuels.

     “Catalytic reforming” means a refinery process which uses a precious metal (such as platinum) based catalyst to convert low octane naphtha to high octane gasoline blendstock and hydrogen. The hydrogen produced from the reforming process is used to desulfurize other refinery oils and is the main source of hydrogen for the refinery.

     “Cracking” means the process of breaking down larger, heavier and more complex hydrocarbon molecules into simpler and lighter molecules.

     “Crude distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing slightly above atmospheric pressure the vapor back to liquid in order to purify, fractionate or form the desired products.

     “Ethanol” means a high octane gasoline blend stock that is used to make various grades of gasoline.

     “FCC,” or fluid catalytic cracking, means a refinery process that breaks down large complex hydrocarbon molecules into smaller more useful ones using a circulating bed of catalyst at relatively high temperatures.

     “Hydrocracker” means a refinery unit that breaks down large complex hydrocarbon molecules into smaller more useful ones using a fixed bed of catalyst at high pressure and temperature with hydrogen.

     “Hydrodesulfurization” means to remove sulfur and nitrogen compounds from oil or gas in the presence of hydrogen and a catalyst at relatively high temperatures.

     “Hydrogen plant” means a refinery unit that converts natural gas and steam to high purity hydrogen, which is then used in the hydrodesulfurization, hydrocracking and isomerization processes.

     “HF alkylation,” or hydrofluoric alkylation, means a refinery process which combines isobutane and C3/C4 olefins using HF acid as a catalyst to make high octane gasoline blend stock.

     “Isomerization” means a refinery process for rearranging the structure of C5/C6 molecules without changing their size or chemical composition and is used to improve the octane of C5/C6 gasoline blendstocks.

     “LPG” means liquid petroleum gases.

     “LSG,” or low sulfur gasoline, means gasoline that contains less than 30 PPM of total sulfur.

     “Lubricant” means a solvent neutral paraffinic product used in passenger and commercial vehicle engine oils, specialty products for metalworking or heat transfer applications and other industrial applications.

     “MMSCFD” means one million standard cubic feet per day.

     “MTBE” means methyl tertiary butyl ether, a high octane gasoline blend stock that is used to make various grades of gasoline.

     “Natural gasoline” means a low octane gasoline blend stock that is purchased and used to blend with other high octane stocks produced to make various grades of gasoline.

     “PPM” means parts-per-million.

     “Refinery gross margin” means the difference between average net sales price and average costs of products per barrel of produced refined products. This does not include the associated depreciation and amortization costs.

     “Reforming” means the process of converting gasoline type molecules into aromatic, higher octane gasoline blend stocks while producing hydrogen in the process.

     “ROSE,” or “Solvent deasphalter / residuum oil supercritical extraction,” means a refinery unit that uses a light hydrocarbon like propane or butane to extract non-asphaltene heavy oils from asphalt or atmospheric reduced crude. These deasphalted oils are then further converted to gasoline and diesel in the FCC process. The remaining asphaltenes are either sold, blended to fuel oil or blended with other asphalt as a hardener.

     “Sour crude oil” means crude oil containing quantities of sulfur greater than 0.4 percent by weight, while “Sweet crude oil” means crude oil containing quantities of sulfur equal to or less than 0.4 percent by weight.

     “ULSD,” or ultra low sulfur diesel, means diesel fuel that contains less than 15 PPM of total sulfur.

     “Vacuum distillation” means the process of distilling vapor from liquid crudes, usually by heating, and condensing below atmospheric pressure the vapor back to liquid in order to purify, fractionate or form the desired products.

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

		June 30,				December 31,
		2009				2008
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	108,688			$	40,805
Marketable securities			791				49,194
Accounts receivable: Product and transportation			240,644				128,337
Crude oil resales			364,056				161,427
			604,700				289,764
Inventories:                Crude oil and refined products			238,405				107,811
Materials and supplies			25,643				17,924
			264,048				125,735
Income taxes receivable			5,841				6,350
Prepayments and other			26,389				18,775
Total current assets			1,010,457				530,623
Properties, plants and equipment, at cost			1,764,456				1,509,701
Less accumulated depreciation			(339,256	)			(304,379	)
			1,425,200				1,205,322
Marketable securities (long-term)			—				6,009
Other assets:                   Turnaround costs			59,913				34,309
Goodwill			27,542				27,542
Intangibles and other			98,329				70,420
			185,784				132,271
Total assets		$	2,621,441			$	1,874,225
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	804,619			$	391,142
Accrued liabilities			46,471				42,016
Short-term debt — Holly Energy Partners			—				29,000
Total current liabilities			851,090				462,158
Long-term debt — Holly Corporation			187,964				—
Long-term debt — Holly Energy Partners			390,056				341,914
Deferred income taxes			88,404				69,491
Other long-term liabilities			77,358				64,330
Equity:
Holly Corporation stockholders’ equity:
Preferred stock, $1.00 par value — 1,000,000 shares authorized; none issued			—				—
Common stock $.01 par value — 160,000,000 shares authorized; 73,569,851 and 73,543,873 shares issued as of June 30, 2009 and December 31, 2008, respectively			738				735
Additional capital			121,818				121,298
Retained earnings			1,166,883				1,145,388
Accumulated other comprehensive loss			(33,929	)			(35,081	)
Common stock held in treasury, at cost — 23,325,356 and 23,600,653 shares as of June 30, 2009 and December 31, 2008, respectively			(685,931	)			(690,800	)
Total Holly Corporation stockholders’ equity			569,579				541,540
Noncontrolling interest			456,990				394,792
Total equity			1,026,569				936,332
Total liabilities and equity		$	2,621,441			$	1,874,225

See accompanying notes.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Sales and other revenues		$	1,038,381			$	1,743,822			$	1,689,204			$	3,223,806
Operating costs and expenses:
Cost of products sold (exclusive of depreciation and amortization)			879,926				1,620,550				1,391,580				3,003,987
Operating expenses (exclusive of depreciation and amortization)			78,508				74,175				145,710				134,883
General and administrative expenses (exclusive of depreciation and amortization)			15,108				12,942				26,855				25,879
Depreciation and amortization			25,500				15,929				45,821				29,238
Total operating costs and expenses			999,042				1,723,596				1,609,966				3,193,987
Income from operations			39,339				20,226				79,238				29,819
Other income (expense):
Equity in earnings of SLC Pipeline			488				—				663				—
Interest income			134				3,826				2,330				7,381
Interest expense			(7,205	)			(6,251	)			(13,444	)			(8,243	)
Tulsa Refinery acquisition costs			(1,610	)			—				(1,610	)			—
Equity in earnings of Holly Energy Partners			—				—				—				2,990
			(8,193	)			(2,425	)			(12,061	)			2,128
Income before income taxes			31,146				17,801				67,177				31,947
Income tax provision:
Current			(6,635	)			(877	)			3,525				5,441
Deferred			16,210				6,733				18,181				5,110
			9,575				5,856				21,706				10,551
Net income			21,571				11,945				45,471				21,396
Less net income attributable to noncontrolling interest			6,966				493				8,921				1,295
Net income attributable to Holly Corporation stockholders		$	14,605			$	11,452			$	36,550			$	20,101
Net income per share attributable to Holly Corporation stockholders — basic		$	0.29			$	0.23			$	0.73			$	0.40
Net income per share attributable to Holly Corporation stockholders — diluted		$	0.29			$	0.23			$	0.73			$	0.39
Cash dividends declared per common share		$	0.15			$	0.15			$	0.30			$	0.30
Average number of common shares outstanding:
Basic			50,170				50,158				50,106				50,654
Diluted			50,226				50,515				50,189				51,015

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		Six Months Ended
		June 30,
		2009				2008
Cash flows from operating activities:
Net income		$	45,471			$	21,396
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			45,821				29,238
Equity in earnings of SLC Pipeline			(598	)			—
Change in fair value — interest rate swaps			(628	)			—
Deferred income taxes			18,181				5,110
Equity based compensation expense			4,337				2,695
Distributions in excess of equity in earnings of Holly Energy Partners			—				3,067
(Increase) decrease in current assets:
Accounts receivable			(316,436	)			(221,285	)
Inventories			(39,579	)			(18,649	)
Income taxes receivable			509				6,323
Prepayments and other			(7,614	)			737
Increase (decrease) in current liabilities:
Accounts payable			413,420				296,611
Accrued liabilities			383				(8,107	)
Turnaround expenditures			(31,069	)			(3,390	)
Other, net			9,352				867
Net cash provided by operating activities			141,550				114,613
Cash flows from investing activities:
Additions to properties, plants and equipment — Holly Corporation			(127,367	)			(186,582	)
Additions to properties, plants and equipment — Holly Energy Partners			(56,026	)			(12,202	)
Acquisition of Tulsa Refinery — Holly Corporation			(157,814	)			—
Investment in SLC Pipeline — Holly Energy Partners			(25,500	)			—
Purchases of marketable securities			(165,892	)			(303,257	)
Sales and maturities of marketable securities			220,281				395,520
Proceeds from sale of crude pipeline and tankage assets			—				171,000
Increase in cash due to consolidation of Holly Energy Partners			—				7,295
Investment in Holly Energy Partners			—				(290	)
Net cash provided by (used for) investing activities			(312,318	)			71,484
Cash flows from financing activities:
Proceeds from issuance of senior notes — Holly Corporation			187,925				—
Proceeds from issuance of common units — Holly Energy Partners			58,355				—
Borrowings under credit agreement — Holly Corporation			94,000				—
Repayments under credit agreement — Holly Corporation			(94,000	)			—
Borrowings under credit agreement — Holly Energy Partners			99,000				40,000
Repayments under credit agreement — Holly Energy Partners			(81,000	)			(20,000	)
Dividends			(15,022	)			(14,055	)
Distributions to noncontrolling interest			(14,529	)			(7,577	)
Purchase of treasury stock			(1,214	)			(136,876	)
Contribution from joint venture partner			8,950				10,000
Excess tax benefit from equity based compensation			2,110				3,436
Deferred financing costs			(5,193	)			(365	)
Other			(731	)			(258	)
Net cash provided by (used for) financing activities			238,651				(125,695	)
Cash and cash equivalents:
Increase for the period			67,883				60,402
Beginning of period			40,805				94,369
End of period		$	108,688			$	154,771
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest		$	13,008			$	6,489
Income taxes		$	11,929			$	3,993

See accompanying notes.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income		$	21,571			$	11,945			$	45,471			$	21,396
Other comprehensive income (loss):
Securities available for sale:
Unrealized gain (loss) on available-for-sale securities			205				501				(258	)			1,327
Reclassification adjustment to net income on sale of marketable securities			—				(32	)			236				(1,339	)
Total unrealized gain (loss) on available-for-sale securities			205				469				(22	)			(12	)
Other comprehensive income of Holly Energy Partners:
Change in fair value of cash flow hedge			4,417				6,797				4,167				2,448
Other comprehensive income before income taxes			4,622				7,266				4,145				2,436
Income tax expense			866				1,273				733				388
Other comprehensive income			3,756				5,993				3,412				2,048
Total comprehensive income			25,327				17,938				48,883				23,444
Less comprehensive income attributable to noncontrolling interest			9,362				4,180				11,181				2,623
Comprehensive income attributable to Holly Corporation stockholders		$	15,965			$	13,758			$	37,702			$	20,821

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1: Description of Business and Presentation of Financial Statements

References herein to Holly Corporation include Holly Corporation and its consolidated subsidiaries. In accordance with the Securities and Exchange Commission’s (“SEC”) “Plain English” guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words “we,” “our,” “ours” and “us” refer only to Holly Corporation and its consolidated subsidiaries or to Holly Corporation or an individual subsidiary and not to any other person with certain exceptions. For periods prior to our reconsolidation of Holly Energy Partners, L.P. (“HEP”) effective March 1, 2008, the words “we,” “our,” “ours” and “us” exclude HEP and its subsidiaries as consolidated subsidiaries of Holly Corporation. Our consolidated financial statements contain certain disclosures of agreements that are specific to HEP and its consolidated subsidiaries and do not necessarily represent obligations of Holly Corporation. When used in descriptions of agreements and transactions, “HEP” refers to HEP and its consolidated subsidiaries.

As of the close of business on June 30, 2009, we:

	•		owned and operated three refineries consisting of our petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively known as the “Navajo Refinery”), our refinery in Woods Cross, Utah (“Woods Cross Refinery”) and our refinery located in Tulsa, Oklahoma (“Tulsa Refinery”). See Note 2 for information on our Tulsa Refinery acquired on June 1, 2009;
	•		owned and operated Holly Asphalt Company which manufactures and markets asphalt products from various terminals in Arizona and New Mexico; and
	•		owned a 41% interest in HEP which includes our 2% general partner interest, which has logistic assets including approximately 2,700 miles of petroleum product and crude oil pipelines located principally in west Texas and New Mexico; ten refined product terminals; a jet fuel terminal; two refinery truck rack facilities; a refined products tank farm facility; on-site crude oil tankage at both our Navajo and Woods Cross Refineries and a 70% interest in Rio Grande Pipeline Company (“Rio Grande”). Additionally, HEP owns a 25% interest in SLC Pipeline LLC (“SLC Pipeline”).

We have prepared these consolidated financial statements without audit. In management’s opinion, these consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 30, 2009, the consolidated results of operations and comprehensive income for the three and six months ended June 30, 2009 and 2008 and consolidated cash flows for the six months ended June 30, 2009 and 2008 in accordance with the rules and regulations of the SEC. Although certain notes and other information required by generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with our consolidated financial statements under Exhibit 99.6 of our Form 8-K dated June 2, 2009 and our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.

These consolidated financial statements reflect management’s evaluation of subsequent events through the time of our filing of this Quarterly Report on Form 10-Q with the SEC on August 10, 2009.

Our results of operations for the first six months of 2009 are not necessarily indicative of the results to be expected for the full year.

Our accounts receivable consist of amounts due from customers which are primarily companies in the petroleum industry. Credit is extended based on our evaluation of the customer’s financial condition and in certain circumstances, collateral, such as letters of credit or guarantees, is required. Credit losses are charged to income when accounts are deemed uncollectible and historically have been minimal. At June 30, 2009 our allowance for doubtful accounts reserve was $2.5 million.

We use the last-in, first-out (“LIFO”) method of valuing inventory. Under the LIFO method, an actual valuation of inventory can only be made at the end of each year based on the inventory levels at that time. Accordingly, interim LIFO calculations are based on management’s estimates of expected year-end inventory levels and are subject to the final year-end LIFO inventory valuation.

Our financial instruments consist of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable, interest rate swaps and debt. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

Debt consists of outstanding principle under the credit agreements and long-term senior notes. The carrying amounts of outstanding debt under the credit agreements approximate fair value as interest rates are reset frequently using current interest rates. The estimated fair values of the senior notes is based on market quotes provided from a third-party bank. See Note 9 for additional information on the senior notes, including fair value estimates.

We adopted SFAS No. 157 “Fair Value Measurements” effective January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It also establishes a fair value hierarchy that categorizes inputs used in fair value measurements into three broad levels as follows:

	•		(Level 1) Quoted prices in active markets for identical assets or liabilities.
	•		(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
	•		(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.

Our investments in marketable securities are measured at fair value using quoted market prices, a Level 1 input. See Note 6 for additional information on our investments in marketable securities, including fair value measurements.

HEP has interest rate swaps that are measured at fair value on a recurring basis using Level 2 inputs. With respect to these instruments, fair value is based on the net present value of expected future cash flows related to both variable and fixed rate legs of our interest rate swap agreements. The measurements are computed using the forward London Interbank Offered Rate (“LIBOR”) yield curve, a market-based observable input. See Note 9 for additional information on the interest rate swaps, including fair value measurements.

New Accounting Pronouncements

Statement of Financial Accounting Standard (“SFAS”) No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin (“ARB”) No. 51”

SFAS No. 160 became effective January 1, 2009, which changes the classification of noncontrolling interests, also referred to as minority interests, in the consolidated financial statements. As a result, all previous references to “minority interest” within this document have been replaced with “noncontrolling interest.” Additionally, net income attributable to the noncontrolling interest in our HEP subsidiary is now presented as an adjustment to net income to arrive at “Net income attributable to Holly Corporation stockholders” in our Consolidated Statements of Income. Prior to our adoption of this standard, this amount was presented as “Minority interests in earnings of Holly Energy Partners,” a non-operating expense item before “Income before income taxes.” Additionally, equity attributable to noncontrolling interests is now presented as a separate component of total equity in our consolidated financial statements. We have applied this standard on a retrospective basis. While this presentation differs from previous GAAP requirements, this standard did not affect our net income and equity attributable to Holly Corporation stockholders.

SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities, an Amendment of SFAS No. 133”

SFAS No. 161 became effective January 1, 2009, which amends and expands the disclosure requirements of SFAS No. 133 to include disclosure of the objectives and strategies related to an entity’s use of derivative instruments,

disclosure of how an entity accounts for its derivative instruments and disclosure of the financial impact including effect on cash flows associated with derivative activity. See Note 9 for disclosure of HEP’s derivative instruments and hedging activity.

Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) SFAS No. 107-1 and Accounting Principles Board (“APB”) No. 28-1 “Interim Disclosures about Fair Value of Financial Instruments”

In April 2009, the FASB issued FSP SFAS No, 107-1 and APB No. 28-1, which extends the annual financial statement disclosure requirements for financial instruments to interim reporting periods of publicly traded companies. We adopted this standard effective June 30, 2009.

SFAS No. 165 “Subsequent Events”

In May 2009, the FASB issued SFAS No. 165 which establishes general standards for accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted this standard effective June 30, 2009. Although this standard requires disclosure of the date through which we have evaluated subsequent events, it did not affect our accounting and disclosure policies with respect to subsequent events.

SFAS No. 167 ”Amendments to FASB Interpretation (“FIN”) No. 46(R)”

In June 2009, the FASB issued SFAS No. 167 which replaces the previous quantitative-based risk and rewards calculation provided under FIN No. 46(R) with a quantitative approach in determining whether an entity is the primary beneficiary of a variable interest entity (“VIE”). Additionally, this standard requires an entity to assess on an ongoing basis whether it is the primary beneficiary of a VIE and enhances disclosures requirements with respect to an entity’s involvement in a VIE. This standard is effective as of the beginning of an entity’s fiscal year beginning after November 15, 2009 including interim periods within that year. While we are currently evaluating the impact of this standard, we do not believe that it will have a material impact on our financial condition, results of operations and cash flows.

NOTE 2: Tulsa Refinery Acquisition

On June 1, 2009 we acquired the Tulsa Refinery, an 85,000 BPSD petroleum refinery located in Tulsa, Oklahoma, from Sunoco Inc. (“Sunoco”) for $157.8 million, including crude oil, refined product and other inventories totaling $92.8 million. The Tulsa Refinery is located on an approximate 750-acre site and has supporting infrastructure including approximately 3.2 million barrels of feedstock and product tankage and an additional 1.2 million barrels of tank capacity that is currently out of service. Additionally, supporting infrastructure includes nine truck racks and six rail racks that support product distribution at the refinery.

Distillates and gasolines are primarily delivered from the Tulsa Refinery to market via two pipelines owned and operated by Magellan Midstream Partners, L.P. These pipelines connect the refinery to distribution channels throughout the mid-continent region of the United States. Additionally, the Tulsa Refinery has a proprietary diesel transfer line to the local Burlington Northern Santa Fe Railroad depot, and the refinery’s truck and rail rack capability facilitates access to local refined product markets. The refinery also produces specialty lubricant products including agricultural oils, base oils, process oils and waxes that are marketed throughout North America and are distributed in Central and South America.

In accounting for this purchase, we recorded $5.9 million in materials and supplies, $92.8 million in crude oil and refined products inventory, $75.9 million in property, plants and equipment, $4.1 million in accrued liabilities and $12.7 in other long-term liabilities. The acquired liabilities primarily relate to environmental and asset retirement obligations. These amounts are based on management’s preliminary fair value estimates and are subject to change. Additionally, we incurred $1.6 million in costs related to our Tulsa Refinery purchase that were expensed as acquisition costs.

For the period from June 1, 2009 (date of acquisition) through June 30, 2009, our Tulsa Refinery generated revenues of $117.6 million and incurred a net loss of $3.7 million. We have not provided disclosure of pro forma revenues and earnings as if the Tulsa Refinery had been operating as a part of our refining business during all periods presented in these financial statements. Pro forma financial information specific to the Tulsa Refinery operations for periods prior to our acquisition is not available in GAAP form. The compilation of such financial information would entail an

extremely manual process of “unwinding” significant volumes of intra-company transactions and obtaining a comprehensive understanding of accounting policies as well as estimates employed by Sunoco with respect to items including, but not limited to, inventory and depreciation. We would then need to recast historical financial information to reflect our own estimates and accounting policies. Therefore, we do not believe that it would be practical to produce this information, nor do we believe it would be representative or comparable with respect to our future operating results.

NOTE 3: Holly Energy Partners

HEP is a publicly held master limited partnership that commenced operations July 13, 2004 upon the completion of its initial public offering. At June 30, 2009, we held 7,000,000 subordinated units and 290,000 common units of HEP, representing a 41% ownership interest in HEP, including our 2% general partner interest. The subordination period for the HEP subordinated units that we own extends until the first day of any quarter beginning after June 30, 2009 that certain conditions are met. After giving effect to the payment of HEP’s quarterly distribution for the quarter ended June 30, 2009, we expect that all of the conditions necessary to end the subordination period will be satisfied and the subordinated units will convert into 7,000,000 HEP common units two business days after the distribution is paid.

HEP is a variable interest entity as defined under FIN No. 46(R). Under the provisions of FIN No. 46(R), HEP’s acquisition of the Crude Pipelines and Tankage Assets (discussed below) qualified as a reconsideration event whereby we reassessed whether HEP continued to qualify as a VIE. Following this transfer, we determined that HEP continued to qualify as a VIE, and furthermore, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting. As a result, our consolidated financial statements include the results of HEP.

On June 1, 2009, HEP acquired our newly constructed 16-inch feedstock pipeline at our cost of $34.2 million. The pipeline runs 65 miles from our Navajo Refinery’s crude oil distillation and vacuum facilities in Lovington, New Mexico to the Navajo petroleum refinery located in Artesia, New Mexico. HEP operates this pipeline as a component of its intermediate pipeline system that services the Navajo Refinery. Since HEP is a consolidated subsidiary, this transaction is eliminated and has no impact on our consolidated financial statements.

In May 2009, HEP closed a public offering of 2,192,400 of its common units priced at $27.80 per unit including 192,400 common units issued pursuant to the underwriters’ exercise of their over-allotment option. Net proceeds of $58.4 million were used to repay bank debt and for general partnership purposes. In addition, we made a capital contribution to HEP of $1.2 million to maintain our 2% general partner interest. As a result of the issuance of additional HEP common units, our ownership interest in HEP was decreased from 46% to 41%. Additionally, this offering and the sale of our 16-inch feedstock pipeline to HEP (discussed above) qualified as reconsideration events whereby we have determined that HEP continues to qualify as a VIE and we remain HEP’s primary beneficiary.

On February 29, 2008, we closed on the sale of certain crude pipelines and tankage assets (the “Crude Pipelines and Tankage Assets”) to HEP for $180.0 million. The assets consisted of crude oil trunk lines that deliver crude oil to our Navajo Refinery in southeast New Mexico, gathering and connection pipelines located in west Texas and New Mexico, on-site crude tankage located within the Navajo and Woods Cross Refinery complexes, a jet fuel products pipeline between Artesia and Roswell, New Mexico, a leased jet fuel terminal in Roswell, New Mexico and crude oil and product pipelines that support our Woods Cross Refinery. Consideration received consisted of $171.0 million in cash and 217,497 HEP common units having a value of $9.0 million.

HEP currently serves our refineries in New Mexico and Utah under three long-term pipeline, terminal and tankage agreements. The majority of HEP’s business is devoted to providing transportation, storage and terminalling services to us. We have an agreement that relates to the pipelines and terminals contributed to HEP by us at the time of their initial public offering in 2004 and expires in 2019 (the “HEP PTA”). Our second agreement relates to the intermediate pipelines sold to HEP in 2005 and in June 2009 and expires in 2024 (the “HEP IPA”). Our third agreement relates to the Crude Pipelines and Tankage Assets sold to HEP as discussed above and expires in February 2023 (the “HEP CPTA”).

Under these agreements, we agreed to transport and store volumes of refined product and crude oil on HEP’s pipelines and terminal and tankage facilities that result in minimum annual payments to HEP. These minimum

annual payments are adjusted each year at a percentage change equal to the change in the producer price index (“PPI”) but will not decrease as a result of a decrease in the PPI. Under these agreements, the agreed upon tariff rates are adjusted each year on July 1 at a rate equal to the percentage change in the PPI or the Federal Energy Regulatory Commission (“FERC”) index, but generally will not decrease as a result of a decrease in the PPI or FERC index. The FERC index is the change in the PPI plus a FERC adjustment factor that is reviewed periodically.

The balance sheet impact of our reconsolidation of HEP on March 1, 2008 was an increase in cash of $7.3 million, an increase in other current assets of $5.9 million, an increase in property, plant and equipment of $336.9 million, an increase in goodwill, intangibles and other assets of $81.5 million, an increase in current liabilities of $19.6 million, an increase in long-term debt of $338.5 million, a decrease in other long-term liabilities of $0.5 million, an increase in noncontrolling interest of $389.1 million and a decrease in distributions in excess of investment in HEP of $315.1 million.

NOTE 4: Earnings Per Share

Basic earnings per share attributable to Holly Corporation stockholders is calculated as net income attributable to Holly Corporation stockholders divided by the average number of shares of common stock outstanding. Diluted earnings per share assumes, when dilutive, the issuance of the net incremental shares from stock options, variable restricted shares and performance share units. The following is a reconciliation of the denominators of the basic and diluted per share computations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands, except per share data)
Net Income attributable to Holly Corporation stockholders		$	14,605			$	11,452			$	36,550			$	20,101
Average number of shares of common stock outstanding			50,170				50,158				50,106				50,654
Effect of dilutive stock options, variable restricted shares and performance share units			56				357				83				361
Average number of shares of common stock outstanding assuming dilution			50,226				50,515				50,189				51,015
Net income per share attributable to Holly Corporation stockholders — basic		$	0.29			$	0.23			$	0.73			$	0.40
Net income per share attributable to Holly Corporation stockholders — diluted		$	0.29			$	0.23			$	0.73			$	0.39

NOTE 5: Stock-Based Compensation

Holly Corporation

On June 30, 2009, we had three principal share-based compensation plans which are described below (collectively, the “Long-Term Incentive Compensation Plan”). The compensation cost that has been charged against income for these plans was $2.5 million and $1.9 million for the three months ended June 30, 2009 and 2008, respectively, and $3.8 million for each of the six months ended June 30, 2009 and 2008. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $1.0 million and $0.7 million for the three months ended June 30, 2009 and 2008, respectively, and $1.5 million for each of the six months ended June 30, 2009 and 2008. Our current accounting policy for the recognition of compensation expense for awards with pro-rata vesting (substantially all of our awards) is to expense the costs pro-rata over the vesting periods. At June 30, 2009, 1,934,897 shares of common stock were reserved for future grants under the current Long-Term Incentive Compensation Plan, which reservation allows for awards of options, restricted stock, or other performance awards.

Additionally, HEP maintains share-based compensation plans for HEP directors and select Holly Logistic Services, L.L.C. executives and employees. Compensation cost attributable to HEP’s share-based compensation plans for the three months ended June 30, 2009 and 2008 was $0.4 million and $0.5 million, respectively, and for the six months

ended June 30, 2009 and 2008 was $0.9 million and $0.8 million, respectively.

Stock Options

Under our Long-Term Incentive Compensation Plan and a previous stock option plan, we have granted stock options to certain officers and other key employees. All the options have been granted at prices equal to the market value of the shares at the time of the grant and normally expire on the tenth anniversary of the grant date. These awards generally vest 20% at the end of each of the five years following the grant date. There have been no options granted since December 2001. The fair value on the date of grant of each option awarded was estimated using the Black-Scholes option pricing model.

A summary of option activity and changes during the six months ended June 30, 2009 is presented below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
Options		Shares				Price				Term				($000)
Outstanding at January 1, 2009			85,200			$	2.98
Exercised			(15,000	)			2.98
Outstanding and exercisable at June 30, 2009			70,200			$	2.98				1.7			$	1,053

The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008, was $0.3 million and $3.1 million, respectively.

Cash received from option exercises under the stock option plans was $45,000 and $0.3 million for the six months ended June 30, 2009 and 2008, respectively. The actual tax benefit realized for the tax deductions from option exercises under the stock option plans totaled $0.1 million and $1.2 million for the six months ended June 30, 2009 and 2008, respectively.

Restricted Stock

Under our Long-Term Incentive Compensation Plan, we grant certain officers, other key employees and outside directors restricted stock awards with substantially all awards vesting generally over a period of one to five years. Although ownership of the shares does not transfer to the recipients until after the shares vest, recipients generally have dividend rights on these shares from the date of grant. The vesting for certain key executives is contingent upon certain earnings per share targets being realized. The fair value of each share of restricted stock awarded, including the shares issued to the key executives, was measured based on the market price as of the date of grant and is being amortized over the respective vesting period.

A summary of restricted stock grant activity and changes during the six months ended June 30, 2009 is presented below:

						Weighted-
						Average				Aggregate
						Grant-Date				Intrinsic Value
Restricted Stock		Grants				Fair Value				($000)
Outstanding at January 1, 2009 (nonvested)			235,310			$	35.86
Vesting and transfer of ownership to recipients			(139,312	)			27.77
Granted			184,182				23.08
Forfeited			(4,045	)			40.06
Outstanding at June 30, 2009 (nonvested)			276,135			$	31.36			$	4,965

The total fair value of restricted stock vested and transferred to recipients during the six months ended June 30, 2009 and 2008 was $3.9 million and $4.9 million, respectively. As of June 30, 2009, there was $4.4 million of total unrecognized compensation cost related to nonvested restricted stock grants. That cost is expected to be recognized over a weighted-average period of 1.1 years.

Performance Share Units

Under our Long-Term Incentive Compensation Plan, we grant certain officers and other key employees performance share units, which are payable in stock upon meeting certain criteria over the service period, and generally vest over a period of one to three years. Under the terms of our performance share unit grants, the awards are subject to “financial performance” criteria.

During the six months ended June 30, 2009, we granted 122,555 performance share units with a fair value based on our grant date closing stock price of $22.94. These units are payable in stock and are subject to certain financial performance criteria.

The fair value of each performance share unit award is computed using the grant date closing stock price of each respective award grant and will apply to the number of units ultimately awarded. The number of shares ultimately issued for each award will be based on our financial performance as compared to peer group companies over the performance period and can range from zero to 200%. As of June 30, 2009, estimated share payouts for outstanding nonvested performance share unit awards ranged from 125% to 175%.

A summary of performance share unit activity and changes during the six months ended June 30, 2009 is presented below:

Performance Share Units		Grants
Outstanding at January 1, 2009 (non-vested)			169,669
Vesting and transfer of ownership to recipients			(72,059	)
Granted			122,555
Forfeited			(4,995	)
Outstanding at June 30, 2009 (non-vested)			215,170

For the six months ended June 30, 2009, we issued 110,971 shares of our common stock having a fair value of $2.2 million related to vested performance share units, representing a 154% payout. Based on the weighted average grant date fair value of $35.07, there was $5.7 million of total unrecognized compensation cost related to non-vested performance share units. That cost is expected to be recognized over a weighted-average period of 1.3 years.

NOTE 6: Cash and Cash Equivalents and Investments in Marketable Securities

Our investment portfolio consists of cash and cash equivalents at June 30, 2009. In addition, we own 1,000,000 shares of Connacher Oil and Gas Limited common stock that was received as partial consideration upon the sale of our Montana Refinery in 2006.

We also at times invest available cash in highly-rated marketable debt securities, primarily issued by government entities that have maturities at the date of purchase of greater than three months. These securities may include investments in variable rate demand notes (“VRDN”).

Our investments in marketable securities are classified as available-for-sale, and as a result, are reported at fair value using quoted market prices. Interest income is recorded as earned. Unrealized gains and losses, net of related income taxes, are generally considered temporary and are reported as a component of accumulated other comprehensive income. For investments in an unrealized loss position that are determined to be other than temporary, unrealized losses are reclassified out of accumulated other comprehensive income and into earnings as an impairment loss. Upon sale, realized gains and losses on the sale of marketable securities are computed based on the specific identification of the underlying cost of the securities sold and the unrealized gains and losses previously reported in other comprehensive income are reclassified to current earnings.

The following is a summary of our available-for-sale securities at June 30, 2009:

Available-for-Sale Securities

Estimated

Gross

Fair Value

Amortized

Unrealized

(Net Carrying

Cost

Gain

Amount)

(In thousands)

Equity securities

$

604

$

187

$

791

The following is a summary of our available-for-sale securities at December 31, 2008:

		Available-for-Sale Securities
														Estimated
						Gross				Recognized				Fair Value
		Amortized				Unrealized				Impairment				(Net Carrying
		Cost				Gain				Loss				Amount)
		(In thousands)
States and political subdivisions		$	54,389			$	210			$	—			$	54,599
Equity securities			4,328				—				(3,724	)			604
Total marketable securities		$	58,717			$	210			$	(3,724	)		$	55,203

For the six months ended June 30, 2009 and 2008 we received a total of $220.3 million and $395.5 million, respectively, related to sales and maturities of our marketable debt securities.

NOTE 7: Inventories

Inventory consists of the following components:

		June 30,				December 31,
		2009				2008
		(In thousands)
Crude oil		$	47,445			$	22,897
Other raw materials and unfinished products (1)			22,789				12,286
Finished products (2)			168,170				72,628
Process chemicals (3)			3,607				3,800
Repairs and maintenance supplies and other			22,037				14,124
		$	264,048			$	125,735

During the three and six months ended June 30, 2009, we recognized a $1.0 million charge to cost of products sold resulting from the liquidation of certain LIFO quantities of inventory that were carried at higher costs as compared to current costs.

NOTE 8: Environmental

Consistent with our accounting policy for environmental remediation costs, we expensed $1.6 million and $0.4 million for the three months ended June 30, 2009 and 2008, respectively, and $4.1 million and $0.4 million for the six months ended June 30, 2009 and 2008, respectively, for environmental remediation obligations. The accrued environmental liability reflected in the consolidated balance sheets was $20.0 million and $7.3 million at June 30, 2009 and December 31, 2008, respectively, of which $13.8 million and $4.2 million, respectively,
were classified as

other long-term liabilities. These liabilities include $10.0 million of environmental obligations that we assumed in connection with our Tulsa Refinery acquisition on June 1, 2009. Costs of future expenditures for environmental remediation are discounted to their present value.

NOTE 9: Debt

Credit Facilities

In April 2009, we entered into a second amended and restated $300.0 million senior secured revolving credit agreement (the “Holly Credit Agreement”) that amends and restates our previous credit agreement in its entirety with Bank of America, N.A. as administrative agent and one of a syndicate of lenders. The credit agreement expires in March 2013 and may be used to fund working capital requirements, capital expenditures, permitted acquisitions or other general corporate purposes. We were in compliance with all covenants at June 30, 2009. At June 30, 2009, we had no outstanding borrowings and letters of credit totaling $61.8 million under the Holly Credit Agreement. At that level of usage, the unused commitment under the Holly Credit Agreement was $238.2 million at June 30, 2009.

HEP has a $300.0 million senior secured revolving credit agreement expiring in August 2011 (the “HEP Credit Agreement”). The HEP Credit Agreement is available to fund capital expenditures, acquisitions and working capital and for other general partnership purposes. HEP’s obligations under the HEP Credit Agreement are collateralized by substantially all of HEP’s assets. HEP assets that are included in our Consolidated Balance Sheets at June 30, 2009 consist of $4.2 million in cash and cash equivalents, $4.8 million in trade accounts receivable and other current assets, $398.8 million in property, plant and equipment, net and $107.0 million in intangible and other assets. Indebtedness under the HEP Credit Agreement is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. Navajo Pipeline Co., L.P., Navajo Refining Company, L.L.C. and Woods Cross Refining Company, L.L.C., three of our subsidiaries, have agreed to indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service due on up to a $171.0 million aggregate principal amount of borrowings under the HEP Credit Agreement.

Holly Senior Notes Due 2017

On June 10, 2009, we issued $200 million in aggregate principal amount of 9.875% senior notes due 2017 (the “Holly Senior Notes”). A portion of the $188.0 million in net proceeds received was used for post-closing payments for inventories of crude oil and refined products from Sunoco following the closing of the Tulsa Refinery purchase on June 1, 2009. The remaining proceeds are available for general business purposes, including capital expenditures.

The Holly Senior Notes mature on June 15, 2017 and bear interest at 9.875%. The Holly Senior Notes are unsecured and impose certain restrictive covenants, including limitations on Holly’s ability to incur additional debt, incur liens, enter into sale-and-leaseback transactions, pay dividends, enter into mergers, sell assets and enter into certain transactions with affiliates. At any time when the Holly Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, we will not be subject to many of the foregoing covenants. Additionally, we have certain redemption rights under the Holly Senior Notes.

HEP Senior Notes Due 2015

The HEP senior notes maturing March 1, 2015 are registered with the SEC and bear interest at 6.25% (the “HEP Senior Notes”). The HEP Senior Notes are unsecured and impose certain restrictive covenants, including limitations on HEP’s ability to incur additional indebtedness, make investments, sell assets, incur certain liens, pay distributions, enter into transactions with affiliates, and enter into mergers. At any time when the HEP Senior Notes are rated investment grade by both Moody’s and Standard & Poor’s and no default or event of default exists, HEP will not be subject to many of the foregoing covenants. Additionally, HEP has certain redemption rights under the HEP Senior Notes. Indebtedness under the HEP Senior Notes is recourse to HEP Logistics Holdings, L.P., its general partner, and guaranteed by HEP’s wholly-owned subsidiaries. Any recourse to the general partner would be limited to the extent of HEP Logistics Holdings, L.P.’s assets, which other than its investment in HEP, are not significant. Navajo Pipeline Co., L.P., one of our subsidiaries, has agreed to indemnify HEP’s controlling partner to the extent it makes any payment in satisfaction of debt service on up to $35.0 million of the principal amount of the HEP Senior Notes.

The carrying amount of Holly’s long-term debt is as follows:

		June 30,				December 31,
		2009				2008
		(In thousands)
Holly Senior Notes
Principal		$	200,000			$	—
Unamortized discount			(12,036	)			—
Total long-term debt		$	187,964			$	—

The carrying amounts of HEP’s long-term debt are as follows:

		June 30,				December 31,
		2009				2008
		(In thousands)
HEP Credit Agreement		$	218,000			$	200,000
HEP Senior Notes
Principal			185,000				185,000
Unamortized discount			(14,908	)			(16,223	)
Unamortized premium – dedesignated fair value hedge			1,964				2,137
			172,056				170,914
Total debt			390,056				370,914
Less short-term borrowings under HEP Credit Agreement(1)			—				29,000
Total long-term debt(1)		$	390,056			$	341,914

At June 30, 2009, the estimated fair values of the Holly Senior Notes and the HEP Senior Notes were $195.0 million and $161.0 million, respectively.

Interest Rate Risk Management

HEP uses interest rate derivatives to manage its exposure to interest rate risk. As of June 30, 2009, HEP had three interest rate swap contracts.

HEP has an interest rate swap that hedges its exposure to the cash flow risk caused by the effects of LIBOR changes on its $171.0 million credit agreement advance that was used to finance its purchase of the Crude Pipelines and Tankage Assets in February 2008. This interest rate swap effectively converts its $171.0 million LIBOR based debt to fixed rate debt having an interest rate of 3.74% plus an applicable margin, currently 2.00%, which equaled an effective interest rate of 5.74% as of June 30, 2009. The maturity of this swap contract is February 28, 2013. HEP intends to renew the HEP Credit Agreement prior to its expiration in August 2011.

HEP has designated this interest rate swap as a cash flow hedge. Based on its assessment of effectiveness using the change in variable cash flows method, HEP determined that the interest rate swap is effective in offsetting the variability in interest payments on the $171.0 million variable rate debt resulting from changes in LIBOR. Under hedge accounting, HEP adjusts the cash flow hedge on a quarterly basis to its fair value with the offsetting fair value adjustment to accumulated other comprehensive income. Also on a quarterly basis, HEP measures hedge effectiveness by comparing the present value of the cumulative change in the expected future interest to be paid or received on the variable leg of their swap against the expected future interest payments on the $171.0 million variable rate debt. Any ineffectiveness is reclassified from accumulated other comprehensive income to interest expense. As of June 30, 2009, HEP had no ineffectiveness on its cash flow hedge.

HEP also has an interest rate swap contract that effectively converts interest expense associated with $60.0 million of the 6.25% HEP Senior Notes from fixed to variable rate debt (“Variable Rate Swap”). Under this swap contract, interest on the $60.0 million notional amount is computed using the three-month LIBOR plus a spread of 1.1575%, which equaled an effective interest rate of 1.83% as of June 30, 2009. The maturity of the swap contract is March 1, 2015, matching the maturity of the HEP Senior Notes.

In October 2008, HEP entered into an additional interest rate swap contract, effective December 1, 2008, that effectively unwinds the effects of the Variable Rate Swap discussed above, converting $60.0 million of the hedged long-term debt back to fixed rate debt (“Fixed Rate Swap”). Under the Fixed Rate Swap, interest on a notional amount of $60.0 million is computed at a fixed rate of 3.59% versus three-month LIBOR which when added to the 1.1575% spread on the Variable Rate Swap results in an effective fixed interest rate of 4.75%. The maturity date of this swap contract is December 1, 2013.

Prior to the execution of HEP’s Fixed Rate Swap, the Variable Rate Swap was designated as a fair value hedge of $60.0 million in outstanding principal under the HEP Senior Notes. HEP dedesignated this hedge in October 2008. At this time, the carrying balance of the HEP Senior Notes included a $2.2 million premium due to the application of hedge accounting until the dedesignation date. This premium is being amortized as a reduction to interest expense over the remaining term of the Variable Rate Swap.

HEP’s interest rate swaps not having a “hedge” designation are measured quarterly at fair value either as an asset or a liability in the consolidated balance sheets with the offsetting fair value adjustment to interest expense. For the three and six months ended June 30, 2009, HEP recognized a reduction of $0.8 million and $0.6 million, respectively, in interest expense attributable to fair value adjustments to its interest rate swaps.

HEP records interest expense equal to the variable rate payments under the swaps. Receipts under the swap agreements are recorded as a reduction to interest expense.

Additional information on HEP’s interest rate swaps is as follows:

		Balance Sheet								Location of Offsetting		Offsetting
Interest Rate Swaps		Location				Fair Value				Balance		Amount
		(In thousands)
Asset
Fixed-to-variable interest rate swap – $60 million of 6.25% HEP Senior Notes		Other assets				$	2,751			Long-term debt - HEP		$	(1,964	)
										Equity			(1,942	)(1)
										Interest expense			1,155	(2)
						$	2,751					$	(2,751	)
Liability
Cash flow hedge — $171 million LIBOR based debt		Other long-term liabilities				$	(8,700	)		Accumulated other comprehensive loss		$	8,700
										Equity			4,166	(1)
Variable-to-fixed interest rate swap – $60 million		Other long-term liabilities					(2,209	)		Interest expense			(1,957	)
						$	(10,909	)				$	10,909

NOTE 10: Equity

Changes to equity during the six months ended June 30, 2009 are presented below:

		Holly
		Corporation
		Stockholders’				Noncontrolling				Total
		Equity				Interest				Equity
Balance at December 31, 2008		$	541,540			$	394,792			$	936,332
Net income			36,550				8,921				45,471
Other comprehensive income			1,152				2,260				3,412
Dividends			(15,055	)			—				(15,055	)
Distributions to noncontrolling interest			—				(14,529	)			(14,529	)
Issuance of common stock upon exercise of stock options			45				—				45
Equity based compensation expense, net of forfeitures			3,920				417				4,337
Tax benefit from equity based compensation			2,110				—				2,110
Issuance of HEP common units, net of issuing costs			—				58,195				58,195
Contribution from joint venture partner			—				7,450				7,450
Purchase of treasury stock			(1,214	)			—				(1,214	)
Other			531				(516	)			15
Balance at December 31, 2008		$	569,579			$	456,990			$	1,026,569

During the six months ended June 30, 2009, we repurchased at current market prices 59,934 shares of our common stock at a cost of approximately $1.2 million from certain officers and key employees. These purchases were made under the terms of restricted stock and performance share unit agreements to provide funds for the payment of payroll and income taxes due at the vesting of restricted shares in the case of officers and employees who did not elect to satisfy such taxes by other means.

NOTE 11: Other Comprehensive Income

The components and allocated tax effects of other comprehensive income are as follows:

						Tax Expense
		Before-Tax				(Benefit)				After-Tax
		(In thousands)
For the three months ended June 30, 2009
Unrealized gain on available-for-sale securities		$	205			$	80			$	125
Unrealized gain on HEP cash flow hedge			4,417				786				3,631
Other comprehensive income			4,622				866				3,756
Less other comprehensive income attributable to noncontrolling interest			2,396				—				2,396
Other comprehensive income attributable to Holly Corporation stockholders		$	2,226			$	866			$	1,360
For the three months ended June 30, 2008
Unrealized gain on available-for-sale securities		$	469			$	182			$	287
Unrealized gain on HEP cash flow hedge			6,797				1,091				5,706
Other comprehensive income			7,266				1,273				5,993
Less other comprehensive income attributable to noncontrolling interest			3,687				—				3,687
Other comprehensive income attributable to Holly Corporation stockholders		$	3,579			$	1,273			$	2,306
For the six months ended June 30, 2009
Unrealized loss on available-for-sale securities		$	(22	)		$	(9	)		$	(13	)
Unrealized gain on HEP cash flow hedge			4,167				742				3,425
Other comprehensive income			4,145				733				3,412
Less other comprehensive income attributable to noncontrolling interest			2,260				—				2,260
Other comprehensive income attributable to Holly Corporation stockholders		$	1,885			$	733			$	1,152

						Tax Expense
		Before-Tax				(Benefit)				After-Tax
		(In thousands)
For the six months ended June 30, 2008
Unrealized loss on available-for-sale securities		$	(12	)		$	(5	)		$	(7	)
Unrealized gain on HEP cash flow hedge			2,448				393				2,055
Other comprehensive income			2,436				388				2,048
Less other comprehensive income attributable to noncontrolling interest			1,328				—				1,328
Other comprehensive income attributable to Holly Corporation stockholders		$	1,108			$	388			$	720

The temporary unrealized gain (loss) on available-for-sale securities is due to changes in market prices of securities.

Accumulated other comprehensive loss in the equity section of our consolidated balance sheets includes:

		June 30,				December 31,
		2009				2008
		(In thousands)
Pension obligation adjustment		$	(29,409	)		$	(29,409	)
Retiree medical obligation adjustment			(2,202	)			(2,202	)
Unrealized gain on available-for-sale securities			115				128
Unrealized loss on HEP cash flow hedge			(2,433	)			(3,598	)
Accumulated other comprehensive loss		$	(33,929	)		$	(35,081	)

NOTE 12: Retirement Plan

We have a non-contributory defined benefit retirement plan that covers most of our employees who were hired prior to January 1, 2007. Our policy is to make contributions annually of not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Benefits are based on the employee’s years of service and compensation.

Effective January 1, 2007, the retirement plan was frozen to new employees not covered by collective bargaining agreements with labor unions. To the extent an employee was hired prior to January 1, 2007, and elected to participate in automatic contributions features under our defined contribution plan, their participation in future benefits of the retirement plan was frozen.

The net periodic pension expense consisted of the following components:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
		(In thousands)
Service cost		$	990			$	1,090			$	2,079			$	2,180
Interest cost			1,189				1,193				2,420				2,386
Expected return on assets			(922	)			(1,143	)			(1,924	)			(2,287	)
Amortization of prior service cost			97				97				195				195
Amortization of net loss			1,818				351				1,837				702
Net periodic benefit cost		$	3,172			$	1,588			$	4,607			$	3,176

The expected long-term annual rate of return on plan assets is 8.5%. This rate was used in measuring 2009 and 2008 net periodic benefit cost. We expect to contribute between zero million and $10.0 million to the retirement plan in 2009.

NOTE 13: Contingencies

In May 2007, the United States Court of Appeals for the District of Columbia Circuit (“Court of Appeals”) issued its decision on petitions for review, brought by us and other parties, concerning rulings by the FERC in proceedings brought by us and other parties against SFPP, L.P. (“SFPP”). These proceedings relate to tariffs of common carrier

pipelines, which are owned and operated by SFPP, for shipments of refined products from El Paso, Texas to Tucson and Phoenix, Arizona and from points in California to points in Arizona. We are one of several refiners that regularly utilize the SFPP pipeline to ship refined products from El Paso, Texas to Tucson and Phoenix, Arizona on SFPP’s East Line. The Court of Appeals in its May 2007 decision approved a FERC position, which is adverse to us, on the treatment of income taxes in the calculation of allowable rates for pipelines operated by partnerships and ruled in our favor on an issue relating to our rights to reparations when it is determined that certain tariffs we paid to SFPP in the past were too high. The income tax issue and the other remaining issues relating to SFPP’s obligations to shippers are being handled by the FERC in a single compliance proceeding covering the period from 1992 through May 2006. We currently estimate that, as a result of the May 2007 Court of Appeals decision and prior rulings by the Court of Appeals and the FERC in these proceedings, a net amount will be due from SFPP to us for the period January 1992 through May 2006 in addition to the $15.3 million we received in 2003 from SFPP as reparations for the period from 1992 through July 2000. Because proceedings in the FERC following the Court of Appeals decision have not been completed and final action by the FERC could be subject to further court proceedings, it is not possible at this time to determine what will be the net amount payable to us at the conclusion of these proceedings.

We and other shippers have been engaged in settlement discussions with SFPP on remaining issues relating to East Line service in the FERC proceedings. A partial settlement covering the period June 2006 through November 2007, which became final in February 2008, resulted in a payment from SFPP to us of approximately $1.3 million in April 2008. On October 22, 2008, we and other shippers jointly filed at the FERC with SFPP a settlement covering the period from December 2008 through November 2010. The Commission approved the settlement on January 29, 2009. The settlement reduced SFPP’s current rates and required SFPP to make additional payments to us of approximately $2.9 million, which was received on May 18, 2009.

On June 2, 2009, SFPP notified us that it would terminate the October 2008 settlement, as provided under the settlement, effective August 31, 2009. On July 31, 2009, SFPP filed substantial rate increases for East Line service to become effective September 1, 2009. We intend to file a protest to this rate increase and to challenge it vigorously. We believe that other shippers will take similar action. We are not in a position to predict the ultimate outcome of the rate proceeding.

We are a party to various other litigation and proceedings which we believe, based on advice of counsel, will not either individually or in the aggregate have a materially adverse impact on our financial condition, results of operations or cash flows.

NOTE 14: Segment Information

Our operations are currently organized into two reportable segments, Refining and HEP. Our operations that are not included in the Refining and HEP segments are included in Corporate and Other. Intersegment transactions are eliminated in our consolidated financial statements and are included in Consolidations and Eliminations.

The Refining segment includes the operations of our Navajo, Woods Cross and Tulsa Refineries and Holly Asphalt Company. It involves the purchase and refining of crude oil and wholesale and branded marketing of refined products, such as gasoline, diesel fuel, jet fuel and specialty lubricant products. The petroleum products produced by the Refining segment are primarily marketed in the southwest, rocky mountain and mid-continent regions of the United States and northern Mexico. Additionally, the Refining segment includes specialty lubricant products produced at our Tulsa Refinery that are marketed throughout North America and are distributed in Central and South America. Holly Asphalt Company manufactures and markets asphalt and asphalt products in Arizona, New Mexico, Texas and northern Mexico.

HEP is a VIE as defined under FIN No. 46(R). Under the provisions of FIN No. 46(R), HEP’s purchase of the Crude Pipelines and Tankage Assets in 2008 qualified as a reconsideration event whereby we reassessed our beneficial interest in HEP. Following this transaction, we determined that our beneficial interest in HEP exceeded 50%. Accordingly, we reconsolidated HEP effective March 1, 2008 and no longer account for our investment in HEP under the equity method of accounting.

The HEP segment involves all of the operations of HEP effective March 1, 2008 (date of reconsolidation). HEP owns and operates a system of petroleum product and crude gathering pipelines in Texas, New Mexico, Oklahoma and Utah, distribution terminals in Texas, New Mexico, Arizona, Utah, Idaho, and Washington and refinery tankage in New Mexico and Utah. Revenues are generated by charging tariffs for transporting petroleum products and crude oil through its pipelines, by leasing certain pipeline capacity to Alon USA, Inc., by charging fees for terminalling refined products and other hydrocarbons and storing and providing other services at its storage tanks and terminals. The HEP segment also includes a 70% interest in Rio Grande which provides petroleum products transportation services. Additionally, HEP owns a 25% interest in SLC Pipeline that services refiners in the Salt Lake City, Utah area. Revenues from the HEP segment are earned through transactions with unaffiliated parties for pipeline transportation, rental and terminalling operations as well as revenues relating to pipeline transportation services provided for our refining operations and from HEP’s interest in Rio Grande. Our revaluation of HEP’s assets and liabilities at March 1, 2008 (date of reconsolidation) resulted in basis adjustments to our consolidated HEP balances. Therefore, our reported amounts for the HEP segment may not agree to amounts reported in HEP’s periodic public filings.

The accounting policies for our segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2008.

														Consolidations
										Corporate				and				Consolidated
		Refining(1)				HEP(2)				and Other				Eliminations				Total
		(In thousands)
Three Months Ended June 30, 2009
Sales and other revenues		$	1,019,919			$	40,602			$	2,979			$	(25,119	)		$	1,038,381
Depreciation and amortization		$	17,832			$	6,482			$	1,186			$	—			$	25,500
Income (loss) from operations		$	29,530			$	21,217			$	(11,408	)		$	—			$	39,339
Capital expenditures		$	38,229			$	45,456			$	480			$	—			$	84,165
Three Months Ended June 30, 2008
Sales and other revenues		$	1,736,201			$	26,774			$	886			$	(20,039	)		$	1,743,822
Depreciation and amortization		$	8,699			$	6,220			$	1,010			$	—			$	15,929
Income (loss) from operations		$	22,736			$	9,210			$	(11,720	)		$	—			$	20,226
Capital expenditures		$	116,509			$	8,950			$	564			$	—			$	126,023
Six Months Ended June 30, 2009
Sales and other revenues		$	1,656,829			$	72,727			$	3,078			$	(43,430	)		$	1,689,204
Depreciation and amortization		$	29,783			$	12,300			$	3,738			$	—			$	45,821
Income (loss) from operations		$	68,235			$	35,403			$	(24,400	)		$	—			$	79,238
Capital expenditures		$	126,467			$	56,026			$	900			$	—			$	183,393
Six Months Ended June 30, 2008
Sales and other revenues		$	3,213,577			$	36,716			$	1,287			$	(27,774	)		$	3,223,806
Depreciation and amortization		$	18,980			$	8,230			$	2,028			$	—			$	29,238
Income (loss) from operations		$	41,620			$	12,944			$	(24,745	)		$	—			$	29,819
Capital expenditures		$	185,325			$	12,202			$	1,257			$	—			$	198,784

														Consolidations
										Corporate				and				Consolidated
		Refining				HEP				and Other				Eliminations				Total
		(In thousands)
June 30, 2009
Cash, cash equivalents and investments in marketable securities		$	—			$	4,195			$	105,284			$	—			$	109,479
Total assets		$	1,807,743			$	524,285			$	302,476			$	(13,063	)		$	2,621,441
December 31, 2008
Cash, cash equivalents and investments in marketable securities		$	—			$	5,269			$	90,739			$	—			$	96,008
Total assets		$	1,288,211			$	458,049			$	141,768			$	(13,803	)		$	1,874,225